Germany's economy

A little stimulus

Even in recession, Germany is the last of the small spenders

CHINA is to spend $586 billion to prop up growth. Japan plans $275 billion-worth of economic stimulus. America's government is expected to pump out still more cash. Into this fiscal pot Germany has tossed a few coins: it has unfurled an “umbrella for jobs”, 15 small-bore measures that include €12 billion ($15 billion) of fresh spending over two years, or roughly 0.25% of GDP. This will trigger €50 billion of investment, promised Chancellor Angela Merkel. But pressure is on the world's third-largest economy, which sank deeply into recession in the third quarter, to do more.

The German budget was close to balance in 2007 and may be in surplus this year, a claim few other rich countries can make (see chart). The world's biggest exporter of goods boasts a current-account surplus that is expected to reach 7% of GDP this year. Rather than spend, Germans have been paying higher taxes and exercising wage restraint to make their firms more competitive: consumption has been flat. This suggests that Germany should be among the first to seize the Keynesian moment that the financial crisis has brought about. Its trading partners certainly think so. Germany “has the possibility to use tax policy to support demand,” says the European Union's economics commissioner, Joaquín Almunia.

So what holds it back? Spending packages enacted to fight slumps in the 1970s produced little but new debt. Since then the prevailing wisdom has been that they do not work. Governments that boost spending in bad times rarely pare it back later. When people see that debts, and thus taxes, are heading up they tend to save more rather than spend, says Joachim Scheide of the Kiel Institute for the World Economy (this phenomenon is known as Ricardian equivalence). The grand coalition of Ms Merkel's Christian Democratic Union (CDU) and the Social Democratic Party (SPD) was set on balancing the federal budget by 2011. The target will not be met, the government admits, but that is no reason to splurge. Even the term economic package is taboo. The umbrella “is not a stimulus package of the old style,” insists the finance minister, Peer Steinbrück.

Yet resistance is crumbling as the economy wobbles. On November 12th the council of five economic “wise men”, which has long defended fiscal prudence, called for a “cyclically justified growth policy” to fight the recession. The government should spend a lot more than planned—0.5-1% of GDP—on first-aid measures that would also improve the economy's long-term health. Investment in transport and early education are top of its list. While the recession is on, the government can let the deficit expand to cover the cost; thereafter it should cut spending elsewhere or boost revenues.

Ms Merkel's umbrella is far from what the wise men have in mind. It includes help for the car industry, subsidies for energy conservation and more lending to small and medium-sized companies by KfW, a state-owned bank. But Ms Merkel faces an election as well as a recession: next September she will fight to keep her job against the SPD's Frank-Walter Steinmeier, now foreign minister. By then the question for both may be not whether to administer more fiscal medicine to a sickly economy, but how.